Oct 30, 2018

Is the Big Tech Growth Era Over?

The law of big numbers dictates that there is a point at which growth projections become absurd, outstripping humankind's ability to buy new gadgets and services. Financial fever-dreams begin to rely on finding living organisms elsewhere in the solar system who do not yetown iPhones and are willing to pay for them with moon rocks. Which is to say, the reality of market saturation intrudes.

In addition, the tech backlash means the increased likelihood of regulatory constraint and an economy based on wealth disparities is unlikely to sustain device prices rising beyond the means of cash-strapped, rent and food dependent consumers. So yes, this may be a long pause, if not an end. JL

Dana Blankenhorn reports in InvestorPlace:

Buying the big tech stocks like Amazon, Google, Microsoft and Apple,
has been the way to riches over the last few years. Is the thesis dead? No, but the cloud-and-devices era has matured. The problem for investors is that the owners of incumbent infrastructure
are supposed to act like utilities, with stable earnings and dividends. Growth for these tech stocks is slowing, profits are accelerating.This transforms the investment thesis for tech from growth to one based on profits. This is particularly
true for the cloud-companies.Revenue shortfalls at Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) caused many to abandon tech stocks October 26. This put into question the continued dominance of the FANG stocks — Facebook (NASDAQ:FB), Amazon, Netflix (NASDAQ:NFLX) and Google — and big tech stocks in general on which the market’s rise this decade was based.
Buying the big tech stocks, particularly cloud names like Amazon, Google, Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), has been the way to riches over the last few years. Even with their recent collapse, the five largest cloud companies had a combined market cap of over $3.8 trillion.
So, is the thesis dead? No, but the cloud-and-devices era has matured. The big tech stocks are now the global economy’s incumbent economic powers as the owners of the infrastructure which is essential to the continued functioning of our current economy and society.

Big Tech Stocks: Our New Economic Overlords

The problem for investors is that the owners of incumbent infrastructure are supposed to act like utilities, with stable earnings and even dividends. The big tech stocks are still investing, with quarterly capital expenditures in what SRG Research calls “hyperscale data centers” exceeding $25 billion during the second quarter, led by the Cloud Czars.
There is every indication this spending continued into the third quarter, as Intel (NASDAQ:INTC), which is one of the primary data center suppliers, handily beat estimates on earnings, led by its data center business, where sales exceeded $6 billion.
Despite the continued investment, all the FAANG stocks are down over the last month. Apple stock is down 4%, Google and Facebook are both down 13%, and Amazon is down a whopping 19%. Even Alibaba Group Holding (NASDAQ:BABA), which dominates China’s cloud, is down over 16%.
Despite this the big tech stocks aren’t cheap. Amazon’s market cap of $784 billion is still more than three times its estimated 2018 sales of $234 billion. Alphabet’s market cap of $731 billion is almost 6 times its 2018 estimated revenue of $130 billion. The problem becomes, how should we value our new economic overlords?
The key to maintaining high capital spending is profitable growth, and while growth for these tech stocks is slowing, profits are accelerating. Amazon and Alphabet both handily beat estimates on profits for the third quarter.
This transforms the investment thesis for tech stocks from one based purely on growth to one based on profits. This is particularly true for the cloud-infrastructure companies.

The Bottom Line

The present panic will subside, and investors are going to get a chance to find new bargains, based on the big tech’s real growth prospects and earnings potential, which I like very much.
The company that has done the most to cross over from being valued based on growth to earnings so far has been Apple. Its price to earnings multiple of 19.7 is actually below the average for the S&P 500 — 22, despite a dividend that has nearly doubled in five years and a huge stock buyback program.
The bottom line is that you’ll soon be able to base investments on big tech stocks the same way other investments are evaluated — on earnings and dividends. And over the next five years those figures still look good. Once the market settles down I’ll be buying more tech stocks — particularly in the companies that provide the cloud infrastructure.

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As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...